The Legislative Context: Finance Bill 2026 Passes with 32 Amendments
The Lok Sabha passed the Finance Bill 2026 on 25 March 2026, approving 32 government-proposed amendments to the taxation framework. The Bill, introduced as part of the Union Budget 2026–27 presented on 1 February 2026 by Finance Minister Nirmala Sitharaman, gives legal force to a range of income-tax, procedural, and incentive-related changes. Among the most consequential for India’s international financial services sector is the extension of the tax holiday under Section 80LA — now re-enacted as Section 147 of the Income Tax Act, 2025 — from 10 years to 20 years.
This amendment sits within the broader policy objective announced in the Budget Memorandum under the heading “Attracting Global Business and Investment”. The Government explicitly stated that the extension is intended to enhance the global competitiveness of the International Financial Services Centre (IFSC) regime and attract long-term financial sector investments into India.
The new Income Tax Act, 2025, which replaces the 65-year-old Income Tax Act of 1961, comes into force on 1 April 2026. The SEZ and IFSC deduction provisions, previously found in Section 80LA of the old Act, are now codified under Section 147 of the new Act — but the Finance Bill 2026 amendments ensure that the transition is accompanied by a significant expansion, not mere re-enactment.
What Exactly Has Changed: The Anatomy of the Amendment
To understand the significance of this amendment, it helps to look at the precise changes across the two categories of beneficiaries — Offshore Banking Units and IFSC units — alongside the parallel position of SEZ export units under Section 10AA.
| Provision | Entity | Earlier Position | Amended Position (w.e.f. 1 Apr 2026) |
|---|---|---|---|
| Section 80LA / Section 147 | Offshore Banking Units (OBUs) in SEZs | 100% deduction for 5 years + 50% for 5 years = 10 consecutive years | 100% deduction for 20 consecutive years; post-holiday income taxed at 15% |
| Section 80LA / Section 147 | IFSC Units (GIFT City and similar) | 100% deduction for 10 years out of a block of 15 years (at the unit’s option) | 100% deduction for 20 years out of a block of 25 years (at the unit’s option); post-holiday income taxed at 15% |
| Section 10AA | SEZ Export Units (Manufacturing & Services) | 100% for 5 years + 50% for 5 years + 50% (reinvested) for 5 years = 15-year window | No change to the deduction structure; 15-year window continues. Sunset clause limits benefit to units commencing before 1 April 2021. |
Section 147(2) of the Income Tax Act, 2025 opens with the phrase: “Irrespective of anything contained in Section 80LA of the Income-tax Act, 1961, the deduction shall be allowed…” This overriding language means both existing and new IFSC units and OBUs fall under the revised 20-year provisions — not the earlier 10-year window. Units that have already commenced their tax holiday period on or before 1 April 2026 are eligible for the remaining years within the expanded 20-year (or 20-out-of-25) window.
(up from 10)
Tax Rate
at GIFT City IFSC
Disbursed via IFSC
Why the Amendment Was Necessary: The Expiry Problem
The amendment did not emerge from academic policy-making. It responded to a concrete, time-sensitive problem: the 10-year tax holiday for several of India’s largest banking institutions at GIFT City IFSC was set to expire. State Bank of India, Bank of Baroda, and Yes Bank — among others — had written to the Government seeking an extension. Without it, these institutions faced the prospect of their IFSC income being taxed at standard corporate rates of 25% to 38%, making their GIFT City operations materially less competitive compared to offshore alternatives in Singapore, Dubai, and Hong Kong.
Global financial institutions evaluate tax stability over 15–25 year horizons when making location decisions for treasury centres, lending desks, and fund management operations. A 10-year holiday — with uncertainty about what happens afterwards — created hesitancy among potential entrants and expansion anxiety among existing tenants.
“The extension of the tax deduction window offers clarity and predictability that global financial institutions look for when making long-term location and capital allocation decisions.”
The amendment addresses this by doubling the tax-free period and then providing a concessional 15% rate for income earned after the holiday exhausts — compared to the 25–38% applicable under the standard corporate tax regime. This two-tier structure (20 years at zero, subsequent years at 15%) is designed to make India’s IFSC permanently competitive, not just temporarily attractive.
Impact on Businesses: Who Benefits and How
The amendment has differentiated impact across three categories of entities: IFSC financial service units, offshore banking units, and SEZ export units. The implications for each are distinct.
🏦 IFSC Units at GIFT City
Fund managers, insurance companies (IIOs), aircraft and ship leasing entities, fintech companies, and capital market intermediaries operating from GIFT City IFSC now have a 20-year window to build scale before any income tax applies. The flexibility to choose 20 out of 25 years means units can optimise their tax holiday against their own revenue trajectory — starting the deduction in a year when profits are substantial, not nominal.
💰 Offshore Banking Units (OBUs)
OBUs now receive a flat 20-year 100% deduction — up from the earlier graduated structure of 100% for 5 years followed by 50% for 5 years. This eliminates the mid-tenure drop in benefit that previously made the latter half of the tax holiday less attractive. Banks can now plan consistent, long-term lending books without factoring in a benefit step-down at the halfway point.
📦 SEZ Export Units (Section 10AA)
The graduated 15-year deduction structure under Section 10AA — 100% for 5 years, 50% for 5 years, and 50% (on reinvested profits) for 5 years — remains unchanged. However, SEZ manufacturers and IT services exporters benefit indirectly: the enhanced IFSC ecosystem creates deeper banking and treasury infrastructure within SEZs, improving access to foreign-currency financing for export operations.
🌍 Foreign Investors & MNCs
For global banks, reinsurance companies, and fund houses evaluating India versus competing jurisdictions, the 20-year certainty is a decisive factor. One in every three dollars of External Commercial Borrowing (ECB) is already initiated from GIFT City. The amendment reinforces India’s position as a credible long-term destination for financial service operations that were previously offshored to Dubai, Singapore, or Mauritius.
The Anti-Abuse Safeguard: What New Units Must Know
The amendment does not come without guardrails. Section 147(5) of the Income Tax Act, 2025, as proposed, introduces an anti-abuse provision for units commencing operations on or after 1 April 2026. The deduction shall be available only if the unit is not formed by splitting up, reconstruction, reorganisation, or transfer of a business already in existence in India.
This is a significant safeguard. It prevents domestic financial operations from simply re-domiciling to an IFSC or SEZ purely to claim the extended tax holiday. The deduction is intended for genuinely new operations that add incremental activity to the Indian financial ecosystem — not for legacy businesses that relocate to capture a tax advantage.
If your entity is contemplating setting up an IFSC unit or OBU after 1 April 2026, ensure the organisational structure can demonstrate that the new unit is not a reconstruction or reorganisation of an existing Indian business. The Assessing Officer will examine the substance of the arrangement — not merely its legal form. Documentation of the new unit’s distinct business plan, independent client base, and separate operational infrastructure will be critical to sustaining the deduction claim.
Compliance Implications: What CAs and CFOs Must Track
The extended deduction period creates new compliance obligations — and extends existing ones over a longer horizon. For Chartered Accountants advising SEZ and IFSC clients, and for CFOs managing multi-year tax positions, the following areas require immediate attention.
The Broader Picture: India’s IFSC Ambition and the SEZ Ecosystem
This amendment is not an isolated tax change. It is part of a deliberate, multi-year strategy to position India — specifically GIFT City in Gandhinagar — as a global financial services hub capable of competing with established centres like Singapore, Hong Kong, Dubai, and London.
Since the establishment of the International Financial Services Centres Authority (IFSCA) in 2019 as a unified regulator, GIFT City has seen accelerating momentum. The centre has crossed the milestone of over 1,000 registered entities spanning banking, reinsurance, asset management, and aircraft and ship leasing. Banks operating from GIFT City have cumulatively disbursed more than $100 billion in foreign-currency loans. Nearly one in every three dollars of ECB raised in India is now initiated from the IFSC.
For SEZ exporters in manufacturing and IT services, the strengthened IFSC ecosystem within SEZs creates tangible collateral benefits: better access to foreign-currency credit, deeper treasury management infrastructure, and a more credible international profile for the SEZ as a whole. When an OBU in a Chennai or Pune SEZ has a 20-year tax-stable operating horizon, it is more likely to build a substantive, long-term lending book for the export units operating alongside it.
The Government has also proposed rationalising the tax treatment of inter-group loans and advances routed through treasury centres at IFSC — further reducing friction for multinational corporations that channel capital through Indian IFSCs to fund domestic and regional operations.
A Long-Term Incentive Demands Long-Term Compliance Discipline
At R. Mahesh & Associates, our practice has spanned the lifecycle of SEZ and IFSC tax incentives — from the early days of Section 10A through the evolution of Section 10AA and now the transition to the new Income Tax Act, 2025. Across this journey, one principle has remained constant: the value of a tax incentive is only as durable as the compliance that supports it.
A 20-year tax holiday is an extraordinary benefit. But it also means 20 years of annual certifications, 20 years of separate books, 20 years of transfer pricing documentation, and 20 years during which a single procedural lapse — a missed Form 10CCF, an unsegregated income stream, a belated return — can jeopardise the deduction for that year or trigger a dispute that contaminates subsequent years.
For our SEZ and IFSC clients, our advice is consistent: build the compliance infrastructure today as if you will be audited in Year 19. The amendment is a signal of the Government’s long-term commitment to these zones. Businesses that match that commitment with sustained compliance rigour will be the ones that realise the full benefit.
Twenty years of tax certainty is a gift. What you build with it depends on how well you document it.
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